EXPD

Business Context and Reporting Period

Company: Expeditors International of Washington, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2005
Business Overview: The Company provides global logistics management, including international freight forwarding (air and ocean), customs brokerage, and value-added distribution services. It operates as a non-asset-based carrier, purchasing transportation services from direct carriers and reselling them to customers. Operations span 57 countries.

Key Financial Metrics

Note: Net Revenue is considered a better measure of performance than Total Revenue as it excludes carrier charges passed through to customers.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 20.1% year-over-year. Net revenues increased 13.9%.
• Segment Performance:
  • Airfreight: Net revenues increased 13% due to higher tonnage handled.
  • Ocean Freight: Volumes (FEUs) increased 28%, but net revenues grew only 15% due to a 194 basis point decline in yields caused by reduced pricing on fee-based services.
  • Customs Brokerage: Net revenues increased 14% driven by demand for sophisticated logistics and regulatory compliance services.
• Expenses: Salaries and related costs increased 12% due to hiring and compensation levels, though they decreased as a percentage of net revenue (54% vs 55%). Other operating expenses increased 14%.
• Capital Expenditures: Increased significantly to $29.0 million from $8.6 million, primarily due to a $21 million acquisition of real estate and an office facility in Seattle, Washington.
• Tax Rate: The effective income tax rate increased to 36.3% from 35.6%, attributed to increased state tax expense from a decrease in taxable income sourced outside the U.S.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: The Company expects normal capital expenditures of approximately $30 million for 2005. However, total capital expenditures could exceed $100 million if the Company adopts a plan to meet investment requirements under Internal Revenue Code (IRC) Section 965 regarding the repatriation of foreign earnings.
• Accounting Changes: The Company is required to adopt SFAS No. 123R (Share-Based Payment) in Q1 2006. Management expects this will have a material impact on earnings per share and cash flows by adding a significant non-cash fixed compensation expense.
• Repatriation of Earnings: The Company is evaluating the impact of the American Jobs Creation Act of 2004 on repatriating foreign earnings. If a plan is adopted under IRC 965, the 2005 tax rate is expected to be lower than prior years.
• Risk Factors:
  • Currency Risk: A 10% weakening of the U.S. Dollar would increase operating income by approximately $4 million; a 10% strengthening would decrease it by $3 million. The Company does not use derivatives to hedge but accelerates currency settlements.
  • Seasonality: Q1 is historically the weakest quarter; Q3 and Q4 are strongest.
  • Competition: The industry is consolidating; competition is based on price and quality of service.

Investor Verification Checklist

• Stock Repurchases: Verify the impact of $14.5 million in stock repurchases during Q1 2005 on share count and EPS.
• Real Estate Investment: Confirm the strategic rationale and expected ROI for the $21 million Seattle facility acquisition.
• Yield Trends: Monitor ocean freight yields, as volume growth (28%) outpaced revenue growth (15%) due to pricing pressures.
• Future Tax Liability: Track the Company's decision regarding IRC 965 repatriation, which could significantly alter 2005 tax expenses and capital spending.
• SFAS 123R Impact: Review pro forma earnings (Net earnings would be $31.2 million vs reported $37.7 million) to understand the upcoming impact of stock-based compensation expensing in 2006.